Paying Taxes: Assessing postfiling processes

Overview

Modern tax systems seek to optimize tax collections while minimizing administrative and taxpayer compliance costs. A low cost of tax compliance and efficient tax-related procedures are advantageous for firms. Overly complicated tax systems are associated with high levels of tax evasion, large informal sectors, more corruption and less investment. Tax compliance systems should be designed so as not to discourage businesses from participating in the formal economy. Taxpayers are more likely to comply voluntarily when a tax administration has established a transparent system that is regarded by taxpayers as being honest and fair. Total tax compliance costs include all major transactions that generate external costs to the taxpayer. In previous reports, only cost of compliance up to the filing of tax returns was measured. However, postfiling processes—such as claiming a value added tax (VAT) refund, undergoing a tax audit or appealing a tax assessment—can be the most challenging interactions that a business has with a tax authority. Doing Business 2017 expands the paying taxes indicators to include a new measure of the time businesses spend complying with two postfiling processes: claiming a VAT refund and correcting a mistake in the corporate income tax return. This case study examines these two postfiling procedures across 190 economies and shows where postfiling processes and practices work efficiently and what drives the differences in the overall tax compliance cost across economies. This case study also includes a section on the structure of a first level administrative appeal process. The data on first level administrative appeal process is not included in the distance to frontier score for paying taxes.

Main Findings

Up until Doing Business 2016, the paying taxes indicator set measured the cost of complying with tax obligations up to the filing of tax returns and the payment of taxes due. Filing the return with the tax authority, however, does not imply agreement with the final tax liability. Postfiling processes—such as claiming a value added tax (VAT) refund, undergoing a tax audit or appealing a tax assessment—can be the most challenging interactions that a business has with a tax authority. Doing Business 2017 expands the paying taxes indicators to include a new measure on postfiling.

Doing Business data shows that OECD high-income economies process VAT refunds the most efficiently with an average of 14.4 weeks to reimburse the VAT refund. Economies in Europe and
Central Asia also perform well with an average refund time of 16 weeks.

On average, businesses spend six hours correcting an error in an income tax return and preparing any additional documents, submitting the files and making additional payment. Even following immediate voluntary notification by the taxpayer, in 74 economies an error in the income tax return is likely to trigger an audit. In 38 economies this error will lead to a comprehensive audit of the tax return.

OECD high-income economies as well as Europe and Central Asia economies have the easiest and simplest processes in place to correct a minor mistake in the corporate income tax return.

An internal administrative review process should be based on a transparent legal framework. This process should be independent and resolve disputes in a timely manner.